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Five Steps to Cutting the Financial Umbilical Cord

One of the biggest impediments standing in the way of retirement for today’s baby boomers is their children. Everyone knows that cost of raising a kid is high, but what’s holding many parents back is the cost of their kid even after they are raised.

Ameriprise Financial surveyed a group of these baby boomers and found that over 90% admit to providing financial support to their grown children.  Over half of them have allowed their kids to move home and live rent free while 71% have helped their kids pay for college.  This doesn’t include all of the parents still dishing out for car insurance, cell phone bills, health insurance, and so on.  It’s a parent’s basic nature to want to support their kids, but there comes a time when it’s best for both sides to cut the umbilical cord and create some financial independence.

50% of the paycheck goes to needs, 30% funds your wants, and 20% should head to savings.

It may be habit.  You have budgeted your entire adult life to afford to pay your kid’s way, so it’s easy to continue doing so.  The problem is that there is something else that should become a staple in your budget instead: retirement fund contributions.  There comes an age when your priorities need to shift from paying for them now, to paying for yourself later.  Think about it.  30 years from now if you don’t have the funds to afford retirement, who do you think will start to foot part of that bill?  Your children.  It’s a vicious circle that can be prevented by encouraging and assisting your kids in standing on their own two financially stable feet.

When it comes to making this move, it’s important to do it correctly in order to avoid heartache and failure in the transition.  Parents are used to the phrase, “It’s for your own good!” and there are a few steps you can take to ensure that the change is for their good, and yours.

Step 1:  Teach them to budget.  This is a lesson that is best started early, but can be useful even if it’s used late.  Many kids have had their finances managed by their parents for their entire lives, and often times have no idea what car insurance costs, or how much money they actually scarf down in groceries each week.  It’s important that they become aware of these costs and recognize their responsibility in paying for them.  You can take advantage of the younger generation’s affinity to technology and point them towards one of the various online budgeting tools available, such as Mint.com, to track their expenses.

Step 2:  Introduce the concept of tradeoffs.   Now that they see what their expenses are, and where all the costs are coming from, help them wrap their head around priority spending.  Sometimes sacrifices must be made in discretionary spending in order to pay for the necessities.  It’s important to let them decided what is worth their money.  Although you may think an unlimited texting plan should give way for the ability to buy gas, they may think that walking to work is worth the ability to send 15,000 texts a month.  They are becoming financially independent, so it’s their job to determine what is important.  Keep in mind, this won’t work if they come to you later that month begging for gas money and you hand over your credit card.  Tough love can be a painful thing, but it’s critical to learning.

Step 3:  Explain to them the importance of saving.  Make sure they have a savings account in place, and talk to them about why they should be saving their money.  Ideally, 20% of their paycheck each month should go to savings.   Most people are taught the 50/30/20 rule.  50% of the paycheck goes to needs, 30% funds your wants, and 20% should head to savings.  This will quickly put your kids on a path to success and get them in the habit of putting that money away for later.

Step 4:  Help them establish some credit.  Credit history is a major roadblock for many young people just starting out.  Most of the time they either have none, or they have a bad one.   This can keep them from qualifying for an apartment or getting good rates on credit programs.  One way to get on track with their credit is for them to take out a small loan and pay it off quickly.  This will start them on a path to responsible credit and will establish some credibility (pun intended).  Also, if your kids have never had a credit card make sure they understand the basics surrounding them.  Credit card debt is one of the biggest holes that young people find themselves in, simply because they didn’t understand the payment and interest schedule.

Step 5: Take it slow and steady.  No one wants to be accused of the harsh act of “cutting your kids off.”  This change doesn’t have to be that way.  Cutting off all of your assistance with one swift chop will leave both you and your kids feeling bad, and will likely send them floundering into a sea of problems.  Gradually pull back your support, slowing shifting the smaller financial responsibilities over to them.  Make sure they can take the weight of each before you put something else on their shoulders.  Of course, this patience has to be coupled with the tough love we talked about earlier.  Talk to them about what they think they can handle each month, and slowly push the accelerator until you’re cruising toward freedom. Your kids are always going to be your babies, but they don’t always have to cost you what they did back then.  It can be hard to wean your kids off your money, but it’s a necessary move.  It’s just one more thing that you can add to the “you can thank me later” list, and it’s only a matter of time until they will.


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